Bullion-ETF's: a multi-purpose scam

May 5, 2009 4:24 PM ET

One of the few ways in which the mainstream media have been willing to acknowledge the strength of the precious metals sector is through regularly noting when the total amount of “bullion” held in these funds continued to set new records.

In fact, total holdings in bullion-ETF's now rivals all national holdings of gold bullion, with the exception of the legendary hoard of Fort Knox, where a battalion of troops is permanently stationed to prevent anyone from breaking in and discovering what is (not?) there.

While I'm sure that the “custodians” of the bullion supposedly held in trust for the ETF's don't require quite that much “security”, it does beg the question of the security costs which would seem to require a significant “management fee”- to pay for those costs, and still give the firms running these ETF's the chance to make a profit (after paying their own administrative costs).

That doesn't even get into the issue of buying the bullion for the bullion-ETF's. Even the major bullion-dealers in India, for decades the most-important buyers of “physical” bullion (in what was the world's largest market) are paying record premiums to get their hands on gold.

However, we are supposed to believe that these magical bullion-ETF's can buy all the bullion they want – with no premium, and then store unlimited quantities of this bullion, for negligible security costs? Sounds more like another Madoff “investment” scheme than a “safe haven” for beleaguered investors.

Another question which bullion-ETF investors should ask themselves is where they would have invested their precious metals dollars if bullion-ETF's did not exist? Obviously the two choices would have been either buying real, “physical” bullion (and deal with storage and/or insurance costs), or they would have invested in the precious metals miners.

Thus, the invention of the bullion-ETF took some money away from investments in real gold, and a lot of money out of the precious metals mining sector. Because these companies leverage the price of gold, the miners typically lead bullion in rallies. Indeed the strength of the miners versus bullion has traditionally been seen as an important technical indicator of the strength of the overall market.

In sapping huge amounts of investor dollars away from the miners, bullion-ETF's have not only directly harmed the miners, but they have dampened an important technical indicator, very likely holding back the entire sector. These bullion-ETF's are sounding better all the time, for the Manipulators.

Meanwhile, at precisely this same moment in time, we learn that not only has Goldman Sachs totally closed their once-HUGE “short” position against gold, but in the month of February, Goldman Sachs (and/or their clients) were taking more “physical” delivery on bullion from the Comex trading in New York than at any time in their history.

It's certainly a lot easier for the fat-cats to buy real gold – when their competition amongst the “little people” is busy buying the paper of bullion-ETF's. Not only do they not have to pay big premiums to buy their gold, but with the amount of investor dollars in so-called “bullion-ETF's seriously diluting the money going into the sector, the fat-cats can buy at a much lower cost-per-ounce than if everyone was buying real gold.

In short, bullion-ETF's serve the purposes of the anti-gold Manipulators so perfectly that it would be hard to imagine they did NOT have a hand in this. In addition, the “business model” of these bullion-ETF's is dubious (to put it mildly), and given the seemingly endless scams which have eluded the “vigilant” (blind/deaf/dumb) SEC, would it be hard to imagine yet another Wall Street fraud-scheme at work here?

Finally, what would happen to the companies running these ETF's and/or their “custodians” should they default on their bullion obligations, or holding requirements? Typically, the fines levied for securities fraud amount to but a few pennies for each dollar of dirty-money “earned”.

The ETF-holders would get their money back (assuming the firm was solvent), but they would hold no gold. Instead, what they thought they had would be sitting snugly in the vault of some billionaire – able to buy it all for about 30-40% less, because the “chumps” were busy buying paper with their money.